April 10 will kick off a new era for the financial services profession. On that day, the Department of Labor conflict of interest rule swings into effect.
The DOL rule waves the fiduciary flag broadly, and it will impact our profession from A to Z.
The rule holds financial institutions (FIs) accountable for client calls to action. Registered reps are not the target of this DOL rule, but their broker/dealers are.
FIs must begin to create a new fiduciary culture if they are to be in compliance with the rule. This new fiduciary culture means the end of some of the frills we have become accustomed to receiving.
Noncash compensation has been an accepted business practice for decades. Reward trips may be incentives for the sales tied to a specific insurance or investment product. “Sell more than $50 million of XYZ annuity and it’s Banff for you.” Sometimes these reward trips are perks for reaching specific production levels at a financial institution. “We have diamond, platinum, gold, bronze, lead and brimstone production levels. The diamonds get a private jet trip to Banff. Avoid the brimstone trip. You’ll need a mask.”
On the surface, these trips do provide an opportunity for collegiality, continuing education, and some harmless rest and relaxation. But dig deeper into the DOL rule and you will find some prohibitions that can take the wind out of the sails.
Most existing commission and financial planning fee models qualify as prohibited, allowing the DOL to control behavior through a classwide prohibited transaction exemption (PTE). Two that likely will be used in distributing insurance products are 84/24 (allowing the commission sale of fixed annuity products in individual retirement accounts and qualified plans) and the best interest contract exemption, or BICE (allowing the commission sale of products with variable and market elements).
In other words, if a financial institution plans on paying commissions for the distribution of products, it will need to pay those commissions in accordance with DOL guidelines.
Standards of Care
Both 84/24 and BICE require financial institutions to act with prudence and adopt alternative fiduciary cultures. Financial institutions that will continue operating in the retirement space must adopt impartial conduct standards of care. These conduct standards require that advisors:
» Give advice that is in the retirement investor’s best interest.
» Charge no more than reasonable compensation.
» Make no misleading statements about investment transactions, compensation and conflicts of interest.
» Implement policies and procedures reasonably and prudently designed to prevent violations of the impartial conduct standards.
Reward trips are difficult to justify through the lens of a fiduciary culture. Incentivizing the sale of a product or family of products over others may encourage conflicted advice. Production-based reward trips also face scrutiny, as they may encourage sales over prudence and client loyalty. If a financial institution incentivizes its advisors to meet a production goal, that goal may put them out of a fiduciary mental model.
Such a culture shift creates an unexplored new space for travel and recognition. Financial institutions will still be free to reward advisors based on their processes, their behavior and their adherence to fiduciary standards.
Developing incentives for behavior rather than for reaching sales goals would look very different and may have a Field of Dreams “build it and they will come” flavor. Look for companies to recognize top producers at annual training and compliance meetings rather than at exclusive events.
Annual training meetings and events will begin reflecting a fiduciary culture. Look for more continuing education and process-oriented speakers; look for less emphasis on motivation and selling techniques. Locations for training, compliance meetings and recognition events may change to those more accessible to all field agents, with fewer meetings in exotic places associated with financial success and prestige.
These changes represent initial steps in the financial services profession’s greater journey toward embracing the new fiduciary standards. There will still be rewards, but they will be accompanied by prudence, loyalty and the best interest of the clients we are pledged to serve.
Craig Lemoine is director of The American College Northwestern Mutual Granum Center for Financial Security. Craig may be contacted at firstname.lastname@example.org.